The Pittsburgh bank's stock (ticker: PNC) has slipped 7% since our story ("Conservative Bank, Liberal Upside," March 7). Even so, PNC's shares have outpaced its peers'; according to Bloomberg, financial services shares have dropped 10.59% over the same span. And its outlook brightened further last week when the bank bought for $3.5 billion, in stock and cash, Royal Bank of Canada's retail banking operations, consisting of $25 billion in assets, $19.4 billion in deposits and 424 branches.

The purchase represents another step on PNC's shift from regional to national bank, widening its footprint in the South from Virginia to Florida on favorable terms and with minimal risk. As part of the deal, PNC Financial took a $2.2 billion write-down on roughly 48% of RBC's nonperforming loans.

"This transaction represents an outstanding growth opportunity for PNC," said James E. Rohr, PNC's chief executive, at a news conference. "We will be paying less than tangible book value with protections built into our agreements."

The bank's retail franchise will expand into "several new Southeastern states," including Alabama, Georgia and North and South Carolina, Rohr added.

Analysts admire PNC's strong balance sheet, its relatively fat capital ratios and its serious attention to old-style spread banking—relying for its earnings primarily on the spread between the interest on its deposits and loans.

Anthony Polini, New York-based senior analyst with Raymond James, maintains his Strong Buy rating on the stock and a price target of $76.

Wrote Polini on June 21: "We believe PNC could eventually warrant a premium P/E multiple given its above-average balance sheet strength [and] favorable [profit] outlook."

Polini arrives at his $76 target by applying a price/earnings ratio of 12.5, the 15-year average for the nation's largest banks and thrifts, to his current 2012 estimate of $6.15 a share.

PNC Financial still sports a large equity stake in BlackRock, the big investment firm, which, according to analyst Polini, it says it plans to maintain.

CEO Warren Buffett probably won't buy back any shares, because he hasn't done so in his 46 years at Berkshire's helm. He prefers to buy companies or invest in stocks and bonds. Still, the Class A shares (ticker: BRKA), trading near $113,000, would be a good purchase for Berkshire since they trade for an appealing 1.2 times the company's March 31 book value of $97,000 a share and 1.15 times our projection of June 30 book of $98,500. The shares have traded at an average of 1.5 to 1.6 times book in the past decade. Buffett has said book "far understates Berkshire's intrinsic value."

Berkshire stock is down from an early-year high of $131,000 and from $124,000 at the annual shareholder meeting on April 30. Buffett said then that Berkshire had been close to a major international acquisition that would have required issuing stock, but he balked at doing the deal because he felt there was a "valuation discrepancy between what we would be giving up versus what we would be receiving." After Buffett praised index funds as a good investment for retail buyers, Vice Chairman Charlie Munger said he liked Berkshire "a lot better than an index fund," according to one meeting participant.

"Berkshire is an incredibly profitable, growing franchise that is trading close to book value," says David Rolfe, chief investment officer at Wedgewood Partners in St. Louis, which owns Berkshire shares. Rolfe values the stock at $170,000 a share. Book value could grow at $10,000 annually in the next few years, assuming moderate stock-market gains. That means Berkshire trades near projected year-end 2012 book value.

So what's ailing Berkshire? The biggest issue appears to be who will follow the 80-year-old Buffett. There's been no heir apparent since the surprise resignation in March of executive David Sokol, after disclosure of Sokol's purchase of Lubrizol stock prior to Berkshire's announcement earlier this year of its deal to buy the chemical company.

Barron's has written favorably on Berkshire, most recently in January, when the stock was at $120,000. The shares have trailed the Standard & Poor's 500 since then.

Thanks to such savvy purchases as Burlington Northern, Berkshire's earnings outlook is good. Buffett has stated that normalized annual earnings power is $12 billion after taxes, or more than $7,000 a share. Cash may approach $50 billion by year end.

The Sokol mess was a negative for Berkshire, but that's more than offset by its low valuation and strong earnings power.

-- Andrew Bary

Bad News for A Gnarly Stock

Last year we heralded the approval of a new treatment called Xiaflex for folks at risk of inheriting the "Viking disease," a crippling finger deformity, common among those with North European roots. But we warned that the new drug's market would be smaller than fans of Xiaflex's maker,
Auxilium Pharmaceuticals,
were counting on. Our skepticism was based on the wide variance in estimates for the potential market: less than 200,000 sufferers, based on data submitted to the Food and Drug Administration in the original application for favored "orphan" status, and six million to 11 million in the numbers touted to Wall Street (see "Good Medicine, Not-So-Great Math," June 28, 2010).

We argued that the lower number seemed more likely and that Auxilium's stock (ticker: AUXL), then 25, should trade in the teens. At a recent 19, the shares are off 23%. The Nasdaq is up 19% over the same stretch.

Sales of Xiaflex have grown over the last year, but that growth already shows signs of faltering. In the first quarter, sales rose to $10.5 million, from a few hundred thousand. But almost $2 million of that resulted from an accounting change. More telling, Auxilium's latest update shows demand leveling off for the smallest quantities, which are typical for infrequent and new prescribers.

Auxilium, which also sells a successful testosterone gel, lost $33 million, or $1.08 a share last year, on revenue of $211 million; negative free cash flow reached $60 million. Management forecasts total revenue of around $270 million this year, with as much as $60 million of that from Xiaflex. Morgan Stanley analyst David Friedman is neutral on the shares with a price target of 26, on hopes that the company reaches profitability by 2013 and earns about $2 a share in 2018, when U.S. sales of Xiaflex peak at $425 million. But if the market turns out to be smaller—along the lines we forecast—he says, the drug's sales might only reach $260 million. The stock, he says, could fall to $11.